Gold: a brief history of price pops
by Chris Sloley on Jul 28, 2011 at 12:19
Thanks to the US debt impasse and a resoundingly bullish market, gold is predicted to reach a mighty $2,000/ounce by the end of 2011. Could this be a bubble that is now set to burst? Here, with the benefit of hindsight, we chart what can happen when the price eventually pops.
Hole in the ground
In July 1999, gold slumped to a 20-year low of $255.85 per ounce and this had severe knock on effects for stocks in mining companies and led to a number of South African mines entering liquidation. Furthermore, Australia’s gold index dropped suddenly and sharply. However, this lull admittedly came after nearly two centuries of stability in the gold market.
Eleven years ago the UK government opted to cash in when its gold price plummeted and sought to offload a material gathering dust rather than interest. Then-chancellor Gordon Brown oversaw the sale between 1999 and 2002 with gold at its lowest ebb and was castigated in 2009 when it emerged that the yellow metal had increased 256% in value in the years following the sale.
At the same time, the IMF, then the world’s third largest holder of gold, used the price plummet as an opening to sell in a bid to bridge the gap between its $1 billion-a-year expenditure and $600 million income. For the canny gold investor, the price drop could be the time to land some formerly sovereign holdings
Developing world hit hardest
The importance of gold in the macro-economic environment has been set out by the World Gold Council, which claims that nearly three-quarters of the world’s heavily indebted poor countries are relatively new but important gold producers. A drop in gold price to the levels seen in the early 2000s was seen as a major threat to the long-term trading potential of emerging gold producers such as Ghana, Mali and Guyana.
Silver picks up the pieces
A sudden drop in gold could benefit its metallic cousin silver, which is currently experiencing its own boom in value, currently worth around $40 per ounce. In the event that market support pulled back from gold then silver could be viewed positively by investors seeking a cheaper safe haven. There could also be some support for other elements such as palladium, uranium, copper and rare earth elements.
Silver experienced its own pop in 1980, when the bubble burst with the precious metal trading at $16.39 an ounce. This marked a sudden leap in silver value, which had traded at an average of $1.63 per ounce a decade earlier. Since the silver price pop, the value of the metal has been building steadily over the past 30 years to reach its all-time high of $40 per ounce.
Admittedly there is unlikely to be a similar occurrence in modern times but the plummeting value of gold sounded the death knell for the yellow metal fiends of the 16th-century Spanish Empire. Over-running with gold from the Americas, the country diverted investment from its domestic industry and spent heavily on imports. This move devalued the currency substantially and led to the Spanish Habsburgs defaulting on its debt several times.